U.S. Markets close in 5 hrs 35 mins

Homebuilders pullback attracts bulls

David Russell (david.russell@optionmonster.com)

Homebuilders have been pausing after a big run, and yesterday momentum buyers came back to the group.

optionMONSTER's tracking programs detected the purchase of 10,000 May 21 calls on KB Home for $0.65. This is fresh buying, as the volume was almost 9 times higher than the open interest in the strike before the session began.

These long calls lock in price where the stock can be purchased no matter how high it might climb. Because they are cheaper than buying shares directly, these options limit the amount money that can be lost if the stock falls while offering the potential for significant leverage in a rally. (See our Education section)

For instance, KBH was unchanged at $20.44 when the contracts hit and then pushed higher to end the session at $21.02, up 2.84 percent. The calls, meanwhile, appreciated more than 40 percent to $0.95.

D.R. Horton saw similar activity in the afternoon, with the May 21 calls bought for $1.65 to $1.80. DHI, which reports quarterly results Thursday morning, rose 1.73 percent to $22.36. Its calls inched up to $1.90.

Homebuilders have been strong over the long term, ranking as the No. 4 group on our proprietary researchLAB market scanner in the last 12 months. But they've lagged in the last six months or so, bringing many names back to potentially interesting levels.

Total option volume was more than 8 times greater than average in each name.

(A version of this post appeared on InsideOptions Pro yesterday.)

More From optionMONSTER